Outlook for China Technology Investments

Last month Warren Buffett invested in BYD, an electric car company in China. So does this mean we should all jump on the China tech investment bandwagon?

At the end of Q1 2011, China even overtook the US in green investments. According to a study led by the Pew Charitable Trusts, Chinese investment in clean energy soared by more than 50 percent in 2009 to reach $34.6 billion, far more than any other country in the Group of 20 major economies.

Last month Warren Buffett invested in BYD, an electric car company in China. So does this mean we should all jump on the China tech investment bandwagon?

At the end of Q1 2011, China even overtook the US in green investments. According to a study led by the Pew Charitable Trusts, Chinese investment in clean energy soared by more than 50 percent in 2009 to reach $34.6 billion, far more than any other country in the Group of 20 major economies.

Franck Nazikian, the founder of CHINICT, the largest annual conference on China tech innovation and entrepreneurship. Since 2005, CHINICT has been pioneering the “chinization” of global tech entrepreneurship & innovation. Indeed, the dynamic of innovation and entrepreneurship is now more and more leaning towards China. And, China is on the verge of becoming bigger than Silicon Valley both as a hotbed giving birth to innovations of global impact, and as a magnet attracting entrepreneurs  from all over the world.

He shares his thoughts on Technology and Investments in China with EconomyWatch:

EconomyWatch: China’s economy has grown tremendously over the past few decades, is that growth set to continue? 

Franck Nazikian: All indicators show that this tremendous growth is here to stay for the years to come – some would even say for the coming 2 to 3 decades. Now, such an amazing growth in a huge country does not come without threats. [quote]For me, the major threat is not an economic cyclical downturn – as some observers may have mentioned – since, if recent (and not so recent) history can teach a lesson, outstanding downturns in capitalistic societies are cyclical. Instead, I believe that the major threat for China is if this outstanding growth does not contribute significantly to build a more harmonious society – by leaving too many people apart.[/quote] And by the way, the Chinese government is well aware of this major threat and has been doing an amazing job at reducing such potential discrepancies – and so far, things are definitely under control.

EconomyWatch: How is China handling its greying population, inflation and inward investment challenges?

Franck Nazikian: China is using a huge amount of its growth to take care of its greying population: In China, this is both a cultural obligation as well as a legal one since building a more harmonious society – that also includes older people – is part of the 5 year plan of the central government. [quote]Regarding inflation, the government has been taking drastic measures to control real estate pricing both in Shanghai and more recently in Beijing – and these measures have significantly kept inflation under control.[/quote]

EconomyWatch: What is your view on China’s growing clout in the IT, Internet and green technology spaces? Are Chinese companies domestically focused, or are they looking to dominate international markets?

Franck Nazikian: I came to China in 2005, after many years spent in Silicon Valley first as a VC and then as an Internet entrepreneur – and after the company I co-founded was acquired by Oracle. What stroke me then was that I felt that there was a tremendous amount of energy, inspiration and innovation potential – with a much bigger dynamic than in Silicon Valley. That’s why I decided to create CHINICT.

And, since 2005, CHINICT has been pioneering the “chinization” of global tech entrepreneurship & innovation. Indeed, the dynamic of innovation and entrepreneurship is now more and more leaning towards China. And, China is on the verge of becoming bigger than Silicon Valley – both as a hotbed giving birth to innovations of global impact & as a magnet attracting entrepreneurs from all over the world.

[quote]Showcasing this silent yet on-going revolution every year in China has not been easy because many people in the West – especially from the US – did not believe that China could significantly innovate and had labeled China once and for all as a “pale imitator” – arguing that most (if not all) the tech successes in China were copy/cut from the West. More and more people and companies from the West have now learned – sometimes at their expenses (see all the unsuccessful Western tech companies in China), that the China copy/cut business model has actually always been a myth.[/quote]

Defending CHINICT’s vision was also not easy inside China for 2 reasons. First, many Chinese actually were doubting their capacities to innovate and were somehow giving in to the US propaganda arguing that China tech companies were mere copy/cut business models from the West. Second, many successful Chinese tech companies had already so much to do on the Chinese market that they had no intention to start conquering overseas market.

[quote]Things started to drastically change a couple of years ago or so – as the West started to realize that companies such as Tencent were ranking among the top 5 Internet companies in terms of market cap – with very innovative business models that had no resemblance with any Western counterparts: the West was discovering China tech innovations of global impact – at the same time as Chinese companies were gaining confidence in their capacities to compete outside of China. On the other hand, the increased competition of the Chinese market is now more and more forcing the most innovative companies from China to go global. [/quote]

EconomyWatch: It has proven notoriously difficult for foreign companies to do well in China, is that likely to change? What investment themes are you seeing emerge this year, and how can foreigners take advantage of those?

Franck Nazikian: If you come to China with arrogant attitude and behavior or with a very candid approach that would consist of giving your destiny to one single “savior” Chinese partner, and many foreign companies do, you should not be surprised and accused the so-called “bad Chinese” for hurting or taking advantage of you. From what I have seen and done myself here in China, I think that one key element to be successful in China is to re-invent your company as a true Chinese company (and not a copy/cut from the West with Chinese translations and a few minor adaptations – which anybody could do). Instead, you should use your own “ingredients” and “recipes” and make sure you still the best cook in your own kitchen and keep control of “ingredients” and “recipes” at all times ! This is easier to say than to do and this is closer to an art form rather than a methodology to follow. That’s why, I am not sure it makes sense to read trendy books about how to make it in China; better would be to read History books in order to at least start creating your own opinion about the Chinese idiosyncrasy.

[quote]Companies such as Google, Ebay and many others are mainly from the US (still the mecca for tech innovation) and came to China – without re-inventing themselves as I was saying earlier. They basically copied their US model and pasted it onto the China market adding a few translations and very minor adaptations – hoping it will miraculously work as it did in highly US-friendly markets such as Europe – but it did not. What they may have wanted to do instead, would have been to re-invent themselves in China using their own know-how acquired in Western markets but applied to China in a different way. Such an approach takes much more efforts than the copy/paste approach – as it implies generally that the company’s leaders/founders do have a genuine interest in China and invest most of their time and energy to re-invent themselves as a Chinese company. [/quote]

Google, a late comer in China, with limited resources, has not made such efforts and yet, with over 20 % of market share in China, Google is a billion dollar company in China – and highly profitable, so, unlike popular belief, we could definitely considered it a success compared to the amount of investment made. Other tech successes in China include companies such as Cisco or Nokia – very efficient in their Chinese operations but also very discrete about their Chinese success.

[quote]The idealized perfect Chinese local partner that will help a Western company thrive in China is definitely a myth: as the leader of your tech venture, if you want to be successful in China you have to come to China and make it happen by yourself with the help of different partners and employees. [/quote]

An alternative may also be to find the right M&A target. Indeed, acquiring or merging with an existing Chinese company, when it is done properly, can definitely help foster a Western company’s operations in China – but it also requires a lot of time and efforts from the top management of the Western headquarters. Amazon, after initial failure in China, finally acquired Joyo and seems to be on the road to success; more recently Zynga’s acquisition of XPmedia seems to put Zynga’s operations in China on the right track. Other tech companies, in particular in the gaming industry,  have started highly successful operations in China – such as Ubisoft, EA, Playfish (now part of EA) – using the drastic or more cautious approach I have just described.

CHINICT’s next conference takes place from May 26 at the Tsinghua Science Park in Beijing.

Find about more about CHINICT’s next event on their website or watch their conference stream here.